(introduction...)

2.10 In contrast to the burgeoning literature dealing with the performance of manufacturing sectors, the food marketing and commodity system literature devotes little attention to the issue of the competitiveness of commodity systems, except in the narrow sense of comparative costs of production, transport, etc.. A food commodity system must be competitive in two different ways in order to be sustainable and provide remunerative returns to producers, processors, and traders. First, it must be competitive with other industries or agricultural commodity systems within the same country in attracting or mobilizing resources needed for its functioning (e.g land, labor, capital, or other resources). Second, except in a totally autarkic or protected situation, a commodity system must also be competitive absolutely against similar commodity systems or industries from other countries. The commodity system may have to compete against these rivals in international markets or may be threatened by them through imports into the domestic market. This is what the literature refers to as 'competitive advantage' or 'international competitiveness'. This second form of competitiveness is of primary interest here.

2.11 Writing in the context of manufacturing industries, Porter (1990) argues that they are two basic types of competitive advantage which firms or industries may have vis-a-vis their rivals. These are:

1) lower cost of production and delivery which allows the firm/industry to underprice its competitors or to obtain superior returns when prices are at or near the level of competitors, and

2) differentiation of product through its quality and through accompanied technical or marketing services which allows the firm/industry to command premium prices and fill profitable niches in the market.

2.12 Porter argues that it is difficult, although not impossible to be both a lower cost and product differentiated supplier compared with one's competitors. This is because achieving the higher quality or level of service needed for differentiation can be very costly. While some technological or institutional methods may simultaneously reduce production and/or marketing costs and add scope for differentiation, Porter contends that competitors will imitate these innovations over the long run, forcing the firm or industry to choose which of the primary sources of competitive advantage to emphasis in its strategy. In the course of an industry's development, technical, economic, or other changes may lead to shifts from a strategy of low cost supply to one of differentiation (or vice versa). In a competitive environment, whether such a shift can be efficiently achieved may be the difference between industry (or firm) prosperity or bankruptcy. This perspective can be applied to patterns of development in food commodity systems.

2.13 In the context of export-oriented agriculture, it is important to recognize a third potential source of competitive advantage. This we may call complementary supply. This arises either when the seasonality of one's production complements rather than overlaps that of other producers or when one's own production faces far less seasonality or inter-annual variability than that of competitors. The commodity system may be in a position to service the 'offseason' market in major consumer countries, and/or capture short-term rents by expanding consignments in the face of production shortfalls in major producing/consuming countries (deriving from adverse weather, outbreaks of disease or pests, or other factors). Complementary supply is not a competitive strategy per se when considering medium-to-long-term trade development. Even when serving an 'off-season' market niche, a firm or industry must still position itself either as a low-cost or product-differentiated supplier.

Determinants of competitiveness

2.14 What factors determine the comparative and competitive advantages of particular food commodity systems? In neoclassical trade theory a country's comparative advantage is associated with its human, physical, and financial resource endowments and the opportunity costs of using such resources to produce (and market) different goods and services. The focus is on comparative costs with countries having a comparative advantage in those industries which intensively use those resources in which the country is relatively well endowed. As noted above, competitive advantage may be based on product (and service) differentiation, rather than lower costs. The determinants of effective product differentiation are many, but may primarily include the quality of human capital and physical infrastructure, the effectiveness of technological development and application, and the receptiveness and competitiveness of consumer and intermediate markets.

2.15 In the trade and manufacturing industry literatures, it is now widely recognized that both comparative and competitive advantage are a product of various policy, technological, human capital, infrastructure, and management factors, in addition to given resource endowments. Table 2 draws on this literature as well as selected studies on agricultural competitiveness to outline a range of factors thought to be important in influencing commodity system competitiveness and growths Such factors condition the incentives to invest in specialized commodity production and marketing activities, influence the likelihood of a supply response to such incentives, and determine the competitiveness of that supply response.

Table 2: Factors Influencing Commodity Sector Competitiveness and Growth

Micro-Marketing and Coordination Elements

Costs/Efficiency of Physical Marketing (Processing, Storage, Transport)
Costs/Efficiency of Buying + Selling
Coordination of Production + Marketing
(New) Product Development
Quality Control
Quantity Control for Sales and Market Power
Risk Sharing/Reduction Measures
Marketing Research and Promotion

2.16 The scope for commodity system development and growth is intimately tied to the size and patterns of rood demand and, in an international context, to the scope for entry into foreign markets. Major changes taking place 'outside' of food marketing systems, including increases in income, changes in taste, changes in work and living patterns, and new technological developments (e.g. refrigeration), strongly influence food demand and create both food marketing opportunities and challenges. Access to particular international markets may be blocked by tariff and non-tariff barriers, or, conversely, be facilitated by preferential treatment on the basis of historical ties or importer foreign policy objectives. Sustained import penetration may thus depend on political bargaining as much as economic competitiveness. Of course, international competitiveness will be strongly influenced by the resource endowments, experience, and political strength of firms and industries in other countries.

2.17 Macroeconomic and sector policies also have a very significant role in shaping the incentives for investment in production and marketing activities. Such policies strongly influence the costs and returns on farm inputs and food products, the relative prices among these products, and the conditions for entry into trade. A stable macroeconomic environment and improvements in that environment strongly influence investment decisions and hence long-term productivity. The incentive to invest and the cost competitiveness of a commodity sector will be undermined by high rates of inflation, high costs for capital, rising labor costs, and an overvalued exchange rate-- all variables subject to influence from government policies.

2.18 While macroeconomic and pricing policies influence product costs and prices, there are important non-price characteristics of food products (e.g. nutritional properties, physical appearance, freshness, timely availability, packaging) which may be just as significant in international competitiveness. In addition, macroeconomic and sector policies do not determine the capacity and speed by which producers and marketing enterprises respond to changes in market and technological opportunities and hence, maintain competitiveness. These are determined more by organizational, institutional, and human capital factors.

2.19 As recognized in neoclassical trade theory, an important basis for comparative (and competitive) advantage is a country's natural resource and human capital endowment. These are certainly important in influencing a country's capacity to be competitive in the production and marketing of particular food products. To the traditional components of this category of resources we add entrepreneurial and trade experience which is vital to any effective marketing effort. In a particular commodity system, such experience can be acquired over time (e.g. 'learning by doing'), transferred in from another local industry, or imported via a foreign or joint venture.

2.20 Well-developed physical and social infrastructure are the second category of goods which are required for an efficient supply response to the incentives provided by market opportunities and favorable macroeconomic conditions. Physical infrastructure such as roads, ports, telephone lines, power systems, railways, terminal markets, and storage and processing facilities are fundamental to a well-functioning marketing system. The same is also the case for the social infrastructure which develops and adapts technologies, provides training and information, and provides financing.

2.21 The final set of factors influencing international competitiveness relate to micro-marketing activities, the coordination of production with downstream requirements, and physical logistics. This is the management element of commodity system development-- the management of physical resources and of interpersonal and organizational relationships. While typically ignored in economic analyses emphasizing quantity/price relationships, these management and coordination elements are central to commodity system operations and competitiveness. It is primarily at the farm and firm levels and in the interfaces between them where levels of productivity, product quality, and transaction costs are determined.